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New Tax Regime Deductions for FY 2025-26: What's In, What's Out, and Who Should Opt In
As we step into Financial Year 2025-26 (Assessment Year 2026-27), taxpayers continue to weigh the pros and cons of the old vs. new tax regimes. Introduced as a simplified alternative, the new tax regime offers lower tax rates in exchange for fewer deductions and exemptions. However, with recent enhancements announced in Union Budget 2025, the new regime has become a compelling option for many.
The Philosophy Behind the New Tax Regime
The new regime is designed with three goals in mind:
Simplicity in compliance
Lower tax rates
Reduced reliance on tax-saving investments and expenses
It suits individuals who prefer not to invest time or money into tax planning strategies involving ELSS, PPF, insurance, etc.
Major Updates Under New Tax Regime for FY 2025-26
1. Higher Basic Exemption Limit
The basic exemption limit under the new regime has been increased, allowing more income to be entirely tax-free. This change ensures better tax savings at lower income levels.
2. Enhanced Section 87A Rebate
A major upgrade!
Taxpayers with net taxable income up to ₹12 lakh under the new regime can now avail the enhanced Section 87A rebate, reducing their tax liability to zero.
3. Standard Deduction Boost for Salaried and Pensioners
The standard deduction has been increased to ₹75,000, providing a direct reduction in taxable income. With this, individuals with salary or pension income up to ₹12.75 lakh (₹12 lakh rebate + ₹75,000 deduction) may pay no income tax at all.
Deductions Still Allowed in the New Tax Regime
Though the new regime eliminates several popular deductions, it retains a select few:
✅ Standard Deduction (₹75,000)
Applicable to salaried individuals and pensioners.
✅ Employer’s Contribution to NPS – Section 80CCD(2)
Up to 14% of basic salary (for central government employees)
Up to 10% for other employees
Often underutilized, but a valuable deduction.
✅ Agniveer Corpus Fund – Section 80CCH
Contributions made by Agniveers under the Agnipath scheme remain deductible.
✅ Transport Allowance (for Differently-Abled Employees)
Specific exemptions continue for differently-abled employees.
✅ Other Allowances & Exemptions:
Conveyance Allowance (for duty-related expenses)
Travel Allowance (for tours/transfers)
Daily Allowance (for duty-related expenses away from base location)
✅ Voluntary Retirement Benefits – Section 10(10C)
Exemption up to a specified limit on amounts received under VRS.
✅ Gratuity – Section 10(10)
Tax-free up to specified limits.
✅ Leave Encashment – Section 10(10AA)
Exempt at the time of retirement/superannuation.
✅ Interest on Housing Loan (Let-Out Property Only) – Section 24(b)
Permissible deduction up to ₹2 lakh for interest paid on loans for rented or deemed-to-be-let-out property. However, losses can’t be carried forward.
✅ Family Pension Deduction – Section 57(iia)
Lesser of ₹25,000 or one-third of pension received is deductible.
What’s NOT Allowed Under the New Tax Regime
Several common deductions and exemptions are disallowed under the new system:
❌ Section 80C/80CCC/80CCD(1)
No deductions for:
PPF, EPF
ELSS Mutual Funds
Life Insurance premiums
Tuition fees
Home loan principal repayments
❌ Section 80D – No deductions for health insurance premiums
❌ Section 80E – No relief for interest on education loans
❌ HRA & LTA – Exemptions not available
❌ Home Loan Interest for Self-Occupied Property – Not allowed (unlike ₹2 lakh limit under old regime)
❌ Other Disallowed Deductions:
80G (Donations)
80TTA/80TTB (Interest on Savings/FDs)
80DD/80DDB (Medical expenses for dependents)
Professional tax and entertainment allowance
Who Should Opt for the New Tax Regime in FY 2025-26?
This regime is ideal for individuals who:
Have income up to ₹12 lakh (as they can fully benefit from the rebate and standard deduction)
Don’t invest heavily in tax-saving instruments
Receive mostly salary or pension income
Are young professionals without housing loans or large medical/education expenses
Prefer simplified tax filing and less documentation
Bottom Line
The new tax regime for FY 2025-26 is now more favorable than ever—especially for individuals in the low to middle-income brackets. With higher exemption limits, a generous rebate, and increased standard deduction, it offers a tax-free window for many.
However, the best choice depends on your personal financial profile. Before locking in your selection for the year, make sure to:
Compare tax liabilities under both regimes
Use tax calculators or consult a tax advisor
Factor in your regular deductions, investments, and long-term financial goals
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